Rare earth elements (REEs) play a critical role in the semiconductor industry, which powers servers and maintains data center operations. The recent suspension of export controls on REEs from China, announced in November 2023, has temporarily alleviated supply chain concerns for Chief Information Officers (CIOs). China accounts for about 70% of global rare earth production and refines approximately 90% of these essential materials, making the stability of this supply a pressing issue for the tech industry.
Despite a current reprieve, experts warn that this situation is not a long-term solution. Cori Masters, Senior Research Analyst Director at Gartner, highlights that reliance on China creates a significant vulnerability. “It’s still viewed from a supply chain perspective as a single source of supply,” she noted, emphasizing the risks associated with depending on one geographic region for such vital resources.
CIOs are currently not facing substantial delays in server equipment deliveries. Nonetheless, longer lead times are becoming increasingly common due to ongoing supply chain complexities. Ashish Nadkarni, Group Vice President of IDC’s Worldwide Infrastructure Research Group, explains that the supply chain intricacies often obscure the critical role of REEs in the broader context of tech procurement.
Understanding Hidden Risks in the Supply Chain
The challenge lies in the multi-layered tech supply chain, where the presence of rare earths often goes unnoticed. According to Masters, these elements are typically embedded deep within the supply chain, especially in the Tier 3 to Tier 5 segments that involve refinement and chemical separation. “Most CIOs are not thinking about the components of the equipment they purchase; they want fair pricing and timely delivery,” she said.
The indirect nature of these risks means that any cost implications may appear as subtle pressures rather than outright shortages. Nadkarni illustrates this point with a grocery analogy: “When you ask a vendor why your lettuce is more expensive, they might attribute it to inflation without knowing the specific sourcing issues.” This lack of visibility can lead to unexpected costs that CIOs might not directly correlate to rare earth supply issues.
Strategies for Mitigating Supply Chain Vulnerability
CIOs can enhance their supply chain resilience by focusing on strategic visibility and diversification. Instead of attempting to monitor the REE market directly, they should demand greater transparency from Tier 1 suppliers regarding their sourcing practices. Masters advises that CIOs should actively seek out indications of material shortages within their supply base, as the Tier 1 vendors may not fully understand the implications of rare earths in their finished goods.
Utilizing supply chain risk management software is also essential. Given that CIOs often work through resellers or systems integrators, direct engagement with chip manufacturers is uncommon. Masters suggests that leveraging technology can help identify vulnerabilities in the supply chain. “There are many supply chain risk management solutions that can help you based on your industry,” she said, noting that REEs are not limited to the tech sector but span various industries, including defense, healthcare, and clean energy.
Encouraging geographic diversification in sourcing practices is crucial for mitigating reliance on a single supplier. Although China currently dominates the REE market, countries like the United States and Australia are working to develop alternative sources. Masters emphasizes the importance of supporting suppliers that utilize these alternative resources, as this will help build a more resilient procurement strategy over time.
Recycling is another avenue worth exploring, although it remains costly and time-consuming. Current methods of extracting REEs from existing devices have not yet proven viable for meeting high-volume semiconductor demands. Additionally, developing semiconductors that minimize the use of rare earths is an appealing idea, but commercially available options are still limited.
The landscape of rare earth supply chains is complex, and CIOs must remain vigilant in their sourcing strategies. By understanding the hidden risks and actively seeking greater visibility and diversification within their supply chains, they can better navigate the challenges posed by the current geopolitical climate and ensure the continued functionality of their technology infrastructure.
